This month, our personal finance columnist, Mitch Hopkinson, looks at the anticipated rise in property prices, and whether 2014 is the right time to get on the property ladder; move to a new home or buy a second property as an investment.
Mitch believes now is a good time to look into reviewing your mortgage and lists the most common queries from individuals looking to do so.
Mitch, a recipient of the ‘Financial Times Independent Financial Adviser of the Year Award’, is Head of East Midlands at deVere United Kingdom, the UK division of deVere Group, one of the world’s largest independent financial advisory organisations.
It’s that time of year again when spring has come and gone and we are all looking forward to our summer holidays.
However, with the property market still making headline news, many of you I am sure are still considering entering the market for the first time or perhaps moving house.
According to the Royal Institution of Chartered Surveyors there is an expectation of an average price growth of six per cent a year over the coming five years. So whether you are buying as an investment or simply a new home for you and your family; is 2014 the right year for you to enter the exciting world of property ownership?
I think that 2014 will be an important year for us all as we will need to weigh up our property ownership options. With over five years of historically low interest rates of 0.5 per cent, the next move for interest rates will almost certainly be an upward one. In light of this, even if you are not moving house, you should think of a ‘spring clean’ of your mortgage, a review at this time could be timely in that you might want to fix in to these low rates, before the upward movements start. With this in mind I have here a short list of the main questions that have commonly been asked over the last 12 months from many individuals looking to enter or remain in the property market.
Q. I have seen a house but can’t sell, what can I do?
In most cases, this is not a major problem. You could for example keep your home and let it out allowing you to move into a new family home or retain your existing property and a second home, which effectively becomes another investment. There are many mortgage options available for people in these circumstances. I would always recommend talking to a qualified mortgage adviser to discuss your options before making a decision in this area as it can be quite complex, and you need to make sure that you properly weigh up all of your options. Alternatively some people will have the option to part exchange their existing property.
Q. How can parents help their first time buyer children with the house buying process?
If your child can’t get a big enough mortgage or is finding it difficult to get on the housing ladder, you could consider a guarantor mortgage. The amount your children could borrow would also take into account your own income and assets.
You would be guaranteeing to meet any repayments should your child fail to do so (nothing changes there then), which could be risky, especially if you still have a mortgage on your own home.
If you are feeling particularly generous in terms of helping your children, you could indeed raise the deposit for them via your own means and gift it to your children so that they can use the deposit for their house purchase. The majority of lenders are happy to accept this.
Q. What is going to happen to UK interest rates?
The Bank of England has kept the UK base rate at 0.5% since March 2009. As the global economic recovery shows signs of gaining pace, it is only a question of time before the base rate rises and mortgage rates follow. Interest rates will rise next year, probably above 1 per cent and possibly as high as 1.75 per cent, City economists say. A Treasury survey shows that Santander and Nomura expected the Bank of England to raise rates to 1.75 per cent by the end of 2015, Citigroup gave a probability-adjusted 1.67 per cent.
So what should you do? If you are worried about affordability and want to have a budget to work to for say five years, you could look to fix your mortgage now for five years. Currently the best five year fixed rates are as follows;
4.54 per cent (90%LTV)
3.04 per cent (70%LTV)
If you would like to hang on and continue to benefit from low rates and do not mind an increase in payments, then a discounted rate could be the one for you. The best lifetime trackers are as follows;
4.77 per cent (two-year fixed rate @ 95%LTV)
per cent (two-year fixed rate @ 75%LTV)
If you are looking to make a move, is the time right for moving or should you stay where you are, this is the basis of my next question;
Q. So following on from the above, should I opt for a fixed rate or tracker/variable rate?
This is a common query and the answer really depends on your circumstances.
The expectations are that the BBR will not increase substantially but increases may be seen within the next one to two years, however this is subject to economic targets and there could well be pressure to start increasing the rate earlier.
You should remember fixed rates will move upwards well before the bank rate does.
The decision is, the security of knowing what your payments will be for the next few years (via a fixed rate) against flexibility and lower initial payments afforded by a tracker. Ultimately only you can decide which one is the most important to you, depending on your circumstances.
Q. Is now a good time to buy property?
Following a recession here in the UK, the economy is showing signs of recovery. A natural consequence of this is that house prices are increasing. Jobs are being created and government targets for new build housing are continually missed. Demand for property will exceed supply for the foreseeable future and so house prices look set to continue to rise although perhaps with more modest rises than seen in previous years. Once again property looks like a good long term investment, particularly if you are able to get a competitive mortgage that is affordable. Avoid the mistakes of the past and try to have a large amount of equity, so that not only will you get the best rate, for example you can see above the difference in rates when the loan to value is lowest.
Having more equity in your property will also give you a cushion should property prices fall, and allow you to stay out of ‘negative equity’. This is crucial when looking to buy your home, the question below deals with how you can decide how much to borrow.
Q. I’m self employed how do I prove my income?
The key for self-employed workers is the need to prove your income to any mortgage lender you apply to. Most will want to see at least two years’ accounts or tax returns. A small number of lenders will allow one year’s tax return. The more accounts you can show the better your chances of getting the best deals.
Q. Can I use the equity in my house to build an extension?
Yes, in the majority of circumstances you can. By either further advance or refinancing. Refinancing may be the better solution but it depends on the interest rate you are paying. You would refinance for the amount of your current mortgage balance plus the amount of the additional funds you require for home improvements. Your monthly payments will be determined on the total amount borrowed plus any refinance fees.
Q. How much can I sensibly borrow?
Lenders have recently moved away from the traditional way of calculating what you can borrow based on so many times your income, to a more detailed analysis of income and outgoings. Many lenders are calculating this figure in different ways. Some lenders for example will take into account benefits and others won’t. Clearly if you are looking to borrow at the limit of what you can afford, using a broker will enable you to have a good discussion about what the right amount is for you, and then in turn put you in touch with the right lenders. You should always remember that if you cannot afford to pay your mortgage, then you would risk the chance of losing your home.
How can I know that I am getting the best advice when I go to get my mortgage? It is important that you get really good advice from a suitably qualified professional. In order to support this the government has been conducting an extensive review, this is called the MMR.
Q. What is the MMR?
The mortgage market review is a regulatory change, enforced by the Financial Conduct Authority with the aim of ensuring that borrowers do not take out a mortgage which they can’t pay back. The review makes it the responsibility of the lenders to do thorough checks on the borrower’s income and outgoings to ensure monthly mortgage payments are affordable.
Most people would be advised to get independent advice when it comes to the biggest financial purchase they are ever likely to make.
Q. Why use a broker, when I can just call into my local bank?
An independent mortgage broker will be able to search the ‘Whole Market Place’ allowing access to thousands of mortgages from hundreds of lenders. A good broker will take their time to discuss with you the options, ensure that they know all about your overall financial situation, and understand what your plans and aspirations are. Combining their knowledge of the market and your circumstances will result in a mortgage that should be more suitable to your needs, rather than the best a lender can do from what they have available.
Mitch Hopkinson is a managing partner of deVere United Kingdom, part of the deVere Group, one of the world’s largest independent advisers of specialist global financial solutions to international, local mass affluent, and high-net-worth clients, through a network of 70 offices across the world and more than 1,000 staff. It has in excess of 80,000 clients and $10bn under advisement.